McKinsey Insights China - Centro Asia Pac­fico - McKinsey Global Economics Intelligence; McKinsey Insights

  • View
    244

  • Download
    0

Embed Size (px)

Text of McKinsey Insights China - Centro Asia Pac­fico - McKinsey Global Economics Intelligence;...

  • Whats next for China?

    November 2012

    Jonathan Woetzel

    Xiujun Lillian Li

    William Cheng

    McKinsey Insights China

  • Contents

    Whats next for China?

    Introduction 1

    What is needed for a consumption-driven economy? 2

    Household income growth as a driver 2

    A shift in the structure of Chinas economy 4

    The changing Chinese city 6

    Peaking of urban labor growth 6

    Wealthier, more productive city dwellers 7

    Pressure on resources 7

    Smaller cities will drive Chinas growth 8

    What are the implications for business? 11

    1. Design city-specific solutions 11

    2. Allocate resources intelligently 11

    3. Serve the people 12

    4. Brand management entails a multibrand portfolio 12

    5. Balance the human-capital equation 12

    6. Innovate for Chinaand beyond 13

  • 1

    ~8 ~7 ~5

    Crackdown on hyperinflation

    Global financial crisis

    Accession to WTO1 ~6

    16

    15

    14

    13

    12

    11

    10

    9

    8

    7

    6

    0

    Annual GDP growth rate%

    Against a target of 7.5% in the 11th FYP, actual growth was 11.2% While the 12th FYP has targeted 7% annual GDP growth, our consensus projections suggest

    that this target could be exceeded during the next 5 years

    Exhibit 1 Chinas GDP growth is likely to slowbut could grow faster than announced targets.

    History

    Forecast

    12th FYP11th FYP2

    1 World Trade Organization.2 Five-year plan.

    Source: McKinsey Global Economics Intelligence; McKinsey Insights China macroeconomic model update (2012, V6)

    1995 2000 2005 2010 2015E 2020E 2025E 2030E12E

    Whats next for China?

    1 The outlook presented in this paper combines insights from McKinseys Insights China and Global Economics Intelligence (GEI). GEI conducts regular polls of a group of senior global executives on their view of the outlook for the global economy and invites them to select from a range of scenarios the one they regard as most likely to unfold. The scenario is then used as the baseline for projections made by McKinseys Insights China research service line, which includes a macroeconomic database for China. Employing the database in conjunction with the selected scenario makes it possible to build the projections presented in this paper.

    Introduction The economic backdrop to the 18th national congress of the Chinese Communist Party may not have been all sunshine. But the continuing robust growth of the worlds second biggest and most dynamic large economy should have provided cheer for Party members as they gathered in Beijing to appoint the next generation of Chinas leadership. And while the new leaderships stance on some issues may be widely debated, there already appears to be a consensus that the country can navigate to a slower but more sustainable growth path marked by greater productivity and consumer input over the coming decadeand there are early signs it is moving in that direction.

    In this paper we provide insights for Chinese and international business leaders into how the profile of Chinas economy is likely to change on this evolutionary path, how this will play out in the countrys cities, which are key drivers of growth, and what are some implications for their businesses.

    Our macroeconomic perspective on China is that the country will maintain growth momentum by transitioning

    from an investment-led economy into a consumption-driven and service-driven economy by 2030. As Chinas economy makes this transition and continues to expand, the consensus of GDP projections that we have compiled suggests that the economys growth rate will be, however, slower than in the last decade (Exhibit 1).

    Markers of Chinas progress toward the goal of a more economically developed society will be higher productivity of its workers and higher productivity and greater efficiency on the part of government. These trends will result in better-paid employment and a greater share of national income in the hands of consumersthe key determinant of Chinas future economic profile. This is the scenario that the experts and international executives whom we regularly survey1 have identified as the most likely for China. We have studied a number of other scenarios, but we are not covering them in this paper because they are not backed by this consensus of opinion.

    Just as in other emerging economies that have moved through an investment-led phase, consumption in China is taking off as income levels rise. At the same time, we expect

  • 2

    policy initiatives led by the Chinese government to reinforce the trends toward higher productivity and higher incomes. These initiatives could include shifting toward services and advanced industry sectors (in particular, seeking leading positions in industries for which China will be a major market), encouraging the accelerated rise of smaller cities in a cluster-based pattern, and boosting efficiency in agriculture and in energy production and energy use. Our projections also suggest that as labor costs rise and the population ages there will be pressure on low-value-added export-oriented sectors and labor-intensive sectors. As a result, these sectors share of the economy could decline.

    For businesses, there are clear opportunities to capture through differentiated approaches to the growing cities markets, while allocating their resources in an optimized way to the emerging hub-and-spoke city clusters. The increasingly affluent population of Chinese consumers presents huge market potential, but Chinas demographic trends will create a more demanding labor landscape in terms of remuneration and employee requirements, and businesses need a comprehensive understanding of the countrys economic environment. Successful innovation in China is similarly likely to depend on deploying this deeper perspective. Companies that take the time to build an understanding of this key market will reap the rewards.

    What is needed for a consumption-driven economy?A new chapter is opening in Chinas development. The country is starting to turn the corner to becoming an economy where private consumption will replace investment as the major driver of GDP growth. Our projections suggest that within the next five years, the consumers contribution to GDP growth will stop its long-term decline and begin to grow and gradually accelerate. In contrast, investment share of GDP growth will continue to decline from the peak it reached in the global financial crisis and its immediate aftermath from 2008 to 2011 (Exhibit 2).

    By evolving in this way, China will be following the same pattern of peaking followed by a decline of investment that has been seen in the economic development of other Asian countries, including Japan and South Korea (Exhibit 3).

    Trade will also see its net contribution to GDP growth decline from the peak it reached in 2008although exports will continue to be an important driver of economic activity,

    particularly in coastal provinces. Our projections suggest that the acceleration of growth in private consumption will result in it becoming the largest contributor to GDP growth by 2020. By around 2025, private consumption will overtake investment as the largest share in GDP overall.

    Household income growth as a driver This evolution marks a major shift from the investment-led growth model that China has been implementing since 1990. Over the past two decades, the growth in Chinas GDP has been largely powered by investment by government and the corporate sectorprimarily state-owned enterprises that retained or reinvested their relatively high returns on investment. This investment has increased at such a fast rate that although household income has risen consistently over the period since 1990, as a percentage of GDP, it has fallen from 70 percent in 1990 to 57 percent in 2011. However, our projections suggest that within the next five years, the household income share of GDP will start to rebound.

    We see three drivers for this acceleration in household income growth. First, wages are likely to rise due to government policies and structural changes in the labor market. Second, financial reforms are likely to stimulate additional employment growth and thus income generation. Third, opening up wider areas of the economy to private enterprise could encourage more productivity growth, lower costs, and allow greater income to accrue to households.

    Exhibit 2 Chinas investment-driven model is expected to convert gradually to a consumer-driven one.

    Privateconsumption

    Investment

    Others1

    Net trade

    1 Others include government consumption and inventory.2 Numbers may not sum to 100 due to rounding.

    Source: Global Insights; McKinsey Insights China macroeconomic model update (2012, V6)

    Real GDP growth decomposition%

    2020E

    45

    18

    36

    13

    2030E2

    54

    35

    2005

    12

    28

    40

    20

    2010

    15

    59

    27

    2012E

    49

    19

    29

    2015E

    41

    18

    39

    3 2 11 3

  • Whats next for China?McKinsey Insights China 3

    1. Wage levels. Policy makers have set a clear target that per capita disposable income should rise at least as fast as GDP in the 12th five-year plan. The main steps are focused on increasing minimum wages and the reference wage. Four-fifths of Chinas administrative districts took action in the first half of 2012: 16 provinces raised the minimum wage by an average of 19.7 percent, and 12 others raised the government reference wage by an average of 14 percent. Supply and demand dynamics are pushing in the same direction as government policy: as we will discuss in more detail later in this paper, Chinas lab